German Federal Election 2017 Outcome

Germany’s Federal election 2017, is due to be held this Sunday 24th September. It could prove illuminating about the political fortunes of Germany and the EU at large.

Don’t hold your breath however. It looks like more of the same. Even if there is a reduced majority held by the CDU/CSU coalition under Angela Merkel, German stocks should rally off the back of the election result. The rally will be a muted affair however.

EURUSD will also rally in line with our previously published forecast of 1.22-1.23. There is not enough of a biased sentiment to be able to predict an outcome based on the “Law of Contrary Opinion”.

It seems the important game changing news is more to do with the US Federal Reserve decision. They plan to wind down its balance sheet which will have far lasting repercussions.

The Coming Four D’s

Over the last 17 years we have witnessed an increasing loss of confidence by voters in liberal democratic governments around the world. The 17 years have truly exposed the fact that politicians have personal agendas beyond serving the needs of their electorates. As political confidence fails, economic confidence fails soon after. Despite confidence failing, the economy seems to totter on fuelled by the vast money expansion of the last 9 years, unprecedented in human history.

Nowhere is this more apparent than in Australia where voters prefer having a “hung parliament” than trusting government. Many Australians feel a sense of unease that something has gone terribly wrong with the “lucky country”. The spontaneous ordering of the Australian electoral process has delivered a series of difficult to govern parliaments reflecting the wishes of voters to minimize damage to themselves. Unfortunately, this situation is also leading to the collapse of political confidence in this country. When that happens, economic confidence fails soon after. Many indicators illustrate an underpinning weakness of the Australian economy and this is accelerating.

Emerging Events foresee a time coming (very soon now) when “The Four D’s” will come to bear in most liberal democratic countries around the world including Australia.

These Four D’s, like the Four Horsemen of the Apocalypse are:

  1. Deleveraging (reduce debt). In Australia it is not so much public debt that is the issue like the US, Japan, UK, Italy, France and others but private debt held in the form of home loans, car loans and consumer loans. Australians today are loaded with debt and at risk of a severe downturn in the economy and property prices. Remember that any debt is a claim on future labour.

2. Deregulation. Over the last 40 years we have seen a massive growth in the amount of red tape choking our ability to get up and achieve. It was Frederick Hayek, the famous Nobel Prize winning economist who said “there is no better way to enslave a people than to enmesh them in a fine set of regulations”. Disempowering career politicians is a powerful solution to ending their crony ways and getting more people into parliament with real world experience. It can be done by setting term limits for politicians. Let them “serve” the electorate for just a few terms before thanking them and sending them on their way.

Unfortunately politicians need to be seen to be doing their job and of course that job involves passing legislation. It’s actually cheaper to send all those Federal politicians on junket trips overseas than to see them pumping out more legislation. Their need to regulate your life is the Progressive agenda and Progressivism is the “strong presumption that government intervention (force) will produce a better result than voluntary society”. In other words, they know better than you how you should lead your life.

3. Deflating the economy. This really means letting prices of everything find their own level rather than being artificially propped up. Since most asset values are overpriced anyway given the quantity of paper money that has been inflated enormously over the last 40 odd years. What we are suggesting is the value of money be allowed to recalibrate at 2016 values to allow money to once again represent a store of value as property, shares, and others assets do today. In other words it should have equal status as an asset.

The best way of achieving this is by making money a store of value again, thereby stopping politicians from endless borrowing and creating endless inflation. While 1 or 2 % inflation may not seem much, it is enough to keep you like a rat on a treadmill, constantly grinding to maintain your standard of living. It doesn’t have to be this way folks. The rising perception that inequality is increasing in many liberal democratic countries stems directly from the expansion of money supply.

  1. The first three D’s will happen regardless of all the politicians and all their minions’ attempts to control the levers of the economy and society at large. The belief they have any control is delusional at best and the consequence of this belief in the long term is, inevitably, a totalitarian state. The fourth D, possibly the most important is up to us and possibly the most important in securing all the rights and privileges available to you from the liberal-democratic tradition you have inherited. The fourth D is about decentralizing or devolving power now concentrated in the hands of federal government. By that I mean we need to devolve power concentrated in the hands of federal government to state and local governments.

We need to remember the political class makes its living from centralized power and the attendant division it causes. But why should ordinary Australians accept the false choice between one brand of centralized government and another, when the obvious solution is staring us in the face? Breaking up power politically is far more practical, and far more humane.

There are two pressing questions you need to ask yourself. Is centralized governance desirable in a vast country like Australia with a population of 24 million people? More importantly is it even really possible? Are overarching political solutions workable, or does politics simply enrich Canberra politicians while feeding the rapidly deteriorating social and economic wellbeing most Australians are experiencing?

In politics, the principle that a central authority such as a federal government should have a lesser function, performing only those tasks which cannot be performed at a more local level is called “subsidiarity“. Subsidiarity as a peaceful approach for devolving centralized power is the first step toward making government smaller and less powerful in our lives. National and even supra-national governments are the biggest threats to human liberty and flourishing because they have a monopoly on violence and coercion: armies, police, missiles, central banks, economic sanctions, centralised taxation, healthcare and welfare. These are the elements of systemic contagion that should terrify us.

Decentralization of power requires more than just devolution of a few powers here or there, but a society-wide commitment to transferring power, authority, and responsibility back to the grass roots. From federal to state, from state to local government. A diverse society can sustain itself peacefully when its members are committed to solving problems as locally as possible, involving higher levels of government only when absolutely necessary.

Your local council may be incompetent, but at the very least it is far more accessible to you. Its damage is likely to be contained, and your ability to change local council may only require moving a few suburbs away.

Subsidiarity is the most realistic and pragmatic approach to creating more freedom in our lifetimes. Winning majority support for supposedly universalist political principles is a daunting challenge. We would do well instead to consider the Swiss federal model, which champions the subsidiarity principle where:

Powers are allocated to the Confederation, the cantons and the communes in accordance with the principle of subsidiarity. Note this was how the Australian constitution was originally set up.

The Confederation only undertakes tasks that cantons (equivalent of shires) are unable to perform or which require uniform regulation by the Confederation.

Under the principle of subsidiarity, nothing that can be done at a lower political level should be done at a higher level.

One of the problems the EU faces at present is that they have lost sight of the subsidiarity principle. More and more control has been handed to Brussels. This is one of the factors why many Britons decided to vote to leave the EU.

Imagine Bill Shorten or Malcolm Turnbull campaigning on the idea in 2019: “I can’t claim to know what’s best for Maroubra, Sydney or Frankston, Victoria or Bunbury, Western Australia in every situation. I’m not omnipotent, and neither are the 150 members of the Commonwealth House of Representatives. We should leave most things up to the people who actually live in those towns. Vote for me if you agree.”

Subsidiarity is not perfect, just better. Freedom, in the political sense of the word, means the ability to live without government coercion. It does not mean the ability to live under broadly agreed-upon social norms, simply because truly universalist political norms are so elusive.

Free societies don’t attempt to impose themselves politically on electoral minorities any more than they attempt to impose themselves militarily on neighboring countries. Politically unyoking different constituencies in Australia makes far more sense than attempting to contain the hatred and division created by mass majority outcomes.

The world is moving toward decentralization, flattening itself and replacing hierarchies with networks. Subsidiary is real diversity in practice and a key solution to restoring the inequities that have arisen in our societies.

Whether we embrace these Four D’s or not, some or all of them will soon be imposed on us anyway.

The Coming Four D’s

Emerging Events examines The Coming Four D’s where Deleveraging, Deregulation, Deflation and Decentralization become the driving forces of change in liberal-democratic nations around the world.

The article focuses on Australia which exemplifies many of the problems liberal-democratic nations face today. We show how “subsidiarity” can bring a peaceful, more content and free society by devolving centralized power.

Political Risk 2 – Reflections

We reported (04/06/2017) prior to the UK General Election 2017:

There is a minor risk of a hung parliament where, like 2010, the new government may have to collaborate to hold office. This would make managing the Brexit process untenable. The loss of political and economic confidence that would ensue would bring chaos to the UK. Should there be an outright victory to Labor, we would see a reversion to the 1950/70’s style politics that would also be a disaster.

Little did we realize how close to the mark we would be. PM May’s electoral disaster has profound repercussions for the UK. Firstly Brexit becomes a challenge at the negotiation table because of the weakened hand PM May presents to the EU. Secondly, Jeremy Corbyn’s success at the polls will force the Conservatives to move to the centre-left of UK politics to capture Corbyn’s new found friends – the 18-34 year demographic that has recently discovered politics and utopian self-interest.

This is a disaster for the UK and will not end well. May’s leadership will be under constant challenge for the next 5 years. One of her few chances of success depends on being able to negotiate a quick exit from the EU. This is unlikely.

As has happened in Australia in 2016, the UK and with a 9% confidence level in US Congress reflecting the rising distrust voters have for politicians. This is a trend that will continue around the world for the foreseeable future. The unintended consequence of voter distrust however is that political confidence begins to fail and economic confidence collapses soon after.

In the United States the Democratic – Republican flash point continues to escalate. President Trump is beginning to claw back a few points against the “Deep State” influence working inside government. Investigations are building cases on leaks and corruption. Trump is slowly gaining momentum with his agenda despite the continual challenge of the left agenda.

Unfortunately the first directly attributable acts of violence have occurred with a Republican Congressman and two police officers wounded at an annual practice baseball session for Congress politicians. The use of violence in political discourse is inherently evil itself and not in keeping with the liberal-democratic tradition that has benefited humanity. Since 2015 we have witnessed an increasing breakdown of civil discourse – a cornerstone of a free society. This marks the first violence of the civil strife we predict emerging in the US. We anticipate this will continue to escalate over the next few years. It will not end well and directly reflects the internal divisions that continue to rent US civil society.

At the same time we move slowly towards The End of the Long Game, the last gasp of the “Industrial Revolution Cycle” that commenced in 1783. We still view the September 2017 – March 2018 time window as the time for that final top, to be followed by the downward phase of the cycle. As always rebirth follows endings and the advance of humanity continues.

This worsening political discord in the US and other liberal democratic countries merely reflect the changing cycle mentioned previously. Given the magnitude of the cycle involved – one that builds and destroys empires, we can glimpse directly at the political and economic forces shaping events and the changes to come.

This is how Big Oil will die

From WHMP / clipart.com

It’s 2025, and 800,000 tons of used high strength steel is coming up for auction.

The steel made up the Keystone XL pipeline, finally completed in 2019, two years after the project launched with great fanfare after approval by the Trump administration. The pipeline was built at a cost of about $7 billion, bringing oil from the Canadian tar sands to the US, with a pit stop in the town of Baker, Montana, to pick up US crude from the Bakken formation. At its peak, it carried over 500,000 barrels a day for processing at refineries in Texas and Louisiana.

But in 2025, no one wants the oil.

The Keystone XL will go down as the world’s last great fossil fuels infrastructure project. TransCanada, the pipeline’s operator, charged about $10 per barrel for the transportation services, which means the pipeline extension earned about $5 million per day, or $1.8 billion per year. But after shutting down less than four years into its expected 40 year operational life, it never paid back its costs.

The Keystone XL closed thanks to a confluence of technologies that came together faster than anyone in the oil and gas industry had ever seen. It’s hard to blame them — the transformation of the transportation sector over the last several years has been the biggest, fastest change in the history of human civilization, causing the bankruptcy of blue chip companies like Exxon Mobil and General Motors, and directly impacting over $10 trillion in economic output.

And blame for it can be traced to a beguilingly simple, yet fatal problem: the internal combustion engine has too many moving parts.  

The Cummins Diesel Engine, US Patent #2,408,298, filed April 1943, awarded Sept 24, 1946

Let’s bring this back to today: Big Oil is perhaps the most feared and respected industry in history. Oil is warming the planet — cars and trucks contribute about 15% of global fossil fuels emissions — yet this fact barely dents its use. Oil fuels the most politically volatile regions in the world, yet we’ve decided to send military aid to unstable and untrustworthy dictators, because their oil is critical to our own security. For the last century, oil has dominated our economics and our politics. Oil is power.

Yet I argue here that technology is about to undo a century of political and economic dominance by oil. Big Oil will be cut down in the next decade by a combination of smartphone apps, long-life batteries, and simpler gearing. And as is always the case with new technology, the undoing will occur far faster than anyone thought possible.

To understand why Big Oil is in far weaker a position than anyone realizes, let’s take a closer look at the lynchpin of oil’s grip on our lives: the internal combustion engine, and the modern vehicle drivetrain.

BMW 8 speed automatic transmission, showing lots of fine German engineered gearing. From Euro Car News.

Cars are complicated.

Behind the hum of a running engine lies a carefully balanced dance between sheathed steel pistons, intermeshed gears, and spinning rods — a choreography that lasts for millions of revolutions. But millions is not enough, and as we all have experienced, these parts eventually wear, and fail. Oil caps leak. Belts fray. Transmissions seize.

To get a sense of what problems may occur, here is a list of the most common vehicle repairs from 2015:

  1. Replacing an oxygen sensor — $249
  2. Replacing a catalytic converter — $1,153
  3. Replacing ignition coil(s) and spark plug(s) — $390
  4. Tightening or replacing a fuel cap — $15
  5. Thermostat replacement — $210
  6. Replacing ignition coil(s) — $236
  7. Mass air flow sensor replacement — $382
  8. Replacing spark plug wire(s) and spark plug(s) — $331
  9. Replacing evaporative emissions (EVAP) purge control valve — $168
  10. Replacing evaporative emissions (EVAP) purging solenoid — $184

And this list raises an interesting observation: None of these failures exist in an electric vehicle.

The point has been most often driven home by Tony Seba, a Stanford professor and guru of “disruption”, who revels in pointing out that an internal combustion engine drivetrain contains about 2,000 parts, while an electric vehicle drivetrain contains about 20. All other things being equal, a system with fewer moving parts will be more reliable than a system with more moving parts.

And that rule of thumb appears to hold for cars. In 2006, the National Highway Transportation Safety Administration estimated that the average vehicle, built solely on internal combustion engines, lasted 150,000 miles.

Current estimates for the lifetime today’s electric vehicles are over 500,000 miles.

The ramifications of this are huge, and bear repeating. Ten years ago, when I bought my Prius, it was common for friends to ask how long the battery would last — a battery replacement at 100,000 miles would easily negate the value of improved fuel efficiency. But today there are anecdotal stories of Prius’s logging over 600,000 miles on a single battery.

The story for Teslas is unfolding similarly. Tesloop, a Tesla-centric ride-hailing company has already driven its first Model S for more 200,000 miles, and seen only an 6% loss in battery life. A battery lifetime of 1,000,000 miles may even be in reach.

This increased lifetime translates directly to a lower cost of ownership: extending an EVs life by 3–4 X means an EVs capital cost, per mile, is 1/3 or 1/4 that of a gasoline-powered vehicle. Better still, the cost of switching from gasoline to electricity delivers another savings of about 1/3 to 1/4 per mile. And electric vehicles do not need oil changes, air filters, or timing belt replacements; the 200,000 mile Tesloop never even had its brakes replaced. The most significant repair cost on an electric vehicle is from worn tires.

For emphasis: The total cost of owning an electric vehicle is, over its entire life, roughly 1/4 to 1/3 the cost of a gasoline-powered vehicle.

Of course, with a 500,000 mile life a car will last 40–50 years. And it seems absurd to expect a single person to own just one car in her life.

But of course a person won’t own just one car. The most likely scenario is that, thanks to software, a person won’t own any.


Here is the problem with electric vehicle economics: A dollar today, invested into the stock market at a 7% average annual rate of return, will be worth $15 in 40 years. Another way of saying this is the value, today, of that 40th year of vehicle use is approximately 1/15th that of the first.

The consumer simply has little incentive to care whether or not a vehicle lasts 40 years. By that point the car will have outmoded technology, inefficient operation, and probably a layer of rust. No one wants their car to outlive their marriage.

But that investment logic looks very different if you are driving a vehicle for a living.

A New York City cab driver puts in, on average, 180 miles per shift (well within the range of a modern EV battery), or perhaps 50,000 miles per work year. At that usage rate, the same vehicle will last roughly 10 years. The economics, and the social acceptance, get better.

And if the vehicle was owned by a cab company, and shared by drivers, the miles per year can perhaps double again. Now the capital is depreciated in 5 years, not 10. This is, from a company’s perspective, a perfectly normal investment horizon.

A fleet can profit from an electric vehicle in a way that an individual owner cannot.

Here is a quick, top-down analysis on what it’s worth to switch to EVs: The IRS allows charges of 53.5¢ per mile in 2017, a number clearly derived for gasoline vehicles. At 1/4 the price, a fleet electric vehicle should cost only 13¢ per mile, a savings of 40¢ per mile.

40¢ per mile is not chump change — if you are a NYC cab driver putting 50,000 miles a year onto a vehicle, that’s $20,000 in savings each year. But a taxi ride in NYC today costs $2/mile; that same ride, priced at $1.60 per mile, will still cost significantly more than the 53.5¢ for driving the vehicle you already own. The most significant cost of driving is still the driver.

But that, too, is about to change. Self-driving taxis are being tested this year in Pittsburgh, Phoenix, and Boston, as well as Singapore, Dubai, and Wuzhen, China.

And here is what is disruptive for Big Oil: Self-driving vehicles get to combine the capital savings from the improved lifetime of EVs, with the savings from eliminating the driver.

The costs of electric self-driving cars will be so low, it will be cheaper to hail a ride than to drive the car you already own.


Today we view automobiles not merely as transportation, but as potent symbols of money, sex, and power. Yet cars are also fundamentally a technology. And history has told us that technologies can be disrupted in the blink of an eye.

Take as an example my own 1999 job interview with the Eastman Kodak company. It did not go well.

At the end of 1998, my father had gotten me a digital camera as a present to celebrate completion of my PhD. The camera took VGA resolution pictures — about 0.3 megapixels — and saved them to floppy disks. By comparison, a conventional film camera had a nominal resolution of about 6 megapixels. When printed, my photos looked more like impressionist art than reality.

However, that awful, awful camera was really easy to use. I never had to go to the store to buy film. I never had to get pictures printed. I never had to sort through a shoebox full of crappy photos. Looking at pictures became fun. 

Wife, with mildly uncooperative cat, January 1999. Photo is at the camera’s original resolution.

I asked my interviewer what Kodak thought of the rise of digital; she replied it was not a concern, that film would be around for decades. I looked at her like she was nuts. But she wasn’t nuts, she was just deep in the Kodak culture, a world where film had always been dominant, and always would be.

This graph plots the total units sold of film cameras (grey) versus digital (blue, bars cut off). In 1998, when I got my camera, the market share of digital wasn’t even measured. It was a rounding error.

By 2005, the market share of film cameras were a rounding error.

A plot of the rise of digital cameras (blue) and the fall of analog (grey). Original from Mayflower via mirrorlessrumors, slightly modified for use here.

In seven years, the camera industry had flipped. The film cameras went from residing on our desks, to a sale on Craigslist, to a landfill. Kodak, a company who reached a peak market value of $30 billion in 1997, declared bankruptcy in 2012. An insurmountable giant was gone.

That was fast. But industries can turn even faster: In 2007, Nokia had 50% of the mobile phone market, and its market cap reached $150 billion. But that was also the year Apple introduced the first smartphone. By the summer of 2012, Nokia’s market share had dipped below 5%, and its market cap fell to just $6 billion.

In less than five years, another company went from dominance to afterthought.A quarter-by-quarter summary of Nokia’s market share in cell phones. From Statista.

Big Oil believes it is different. I am less optimistic for them.

An autonomous vehicle will cost about $0.13 per mile to operate, and even less as battery life improves. By comparison, your 20 miles per gallon automobile costs $0.10 per mile to refuel if gasoline is $2/gallon, and that is before paying for insurance, repairs, or parking. Add those, and the price of operating a vehicle you have already paid off shoots to $0.20 per mile, or more.

And this is what will kill oil: It will cost less to hail an autonomous electric vehicle than to drive the car that you already own.

If you think this reasoning is too coarse, consider the recent analysis from the consulting company RethinkX (run by the aforementioned Tony Seba), which built a much more detailed, sophisticated model to explicitly analyze the future costs of autonomous vehicles. Here is a sampling of what they predict:

  • Self-driving cars will launch around 2021
  • A private ride will be priced at 16¢ per mile, falling to 10¢ over time.
  • A shared ride will be priced at 5¢ per mile, falling to 3¢ over time.
  • By 2022, oil use will have peaked
  • By 2023, used car prices will crash as people give up their vehicles. New car sales for individuals will drop to nearly zero.
  • By 2030, gasoline use for cars will have dropped to near zero, and total crude oil use will have dropped by 30% compared to today.

The driver behind all this is simple: Given a choice, people will select the cheaper option.

Your initial reaction may be to believe that cars are somehow different — they are built into the fabric of our culture. But consider how people have proven more than happy to sell seemingly unyielding parts of their culture for far less money. Think about how long a beloved mom and pop store lasts after Walmart moves into town, or how hard we try to “Buy American” when a cheaper option from China emerges.

And autonomous vehicles will not only be cheaper, but more convenient as well — there is no need to focus on driving, there will be fewer accidents, and no need to circle the lot for parking. And your garage suddenly becomes a sunroom.

For the moment, let’s make the assumption that the RethinkX team has their analysis right (and I broadly agree[1]): Self-driving EVs will be approved worldwide starting around 2021, and adoption will occur in less than a decade.

How screwed is Big Oil?


Perhaps the metaphors with film camera or cell phones are stretched. Perhaps the better way to analyze oil is to consider the fate of another fossil fuel: coal.

The coal market is experiencing a shock today similar to what oil will experience in the 2020s. Below is a plot of total coal production and consumption in the US, from 2001 to today. As inexpensive natural gas has pushed coal out of the market, coal consumption has dropped roughly 25%, similar to the 30% drop that RethinkX anticipates for oil. And it happened in just a decade.

Coal consumption has dropped 25% from its peak. From the Kleinman Center for Energy Policy.

The result is not pretty. The major coal companies, who all borrowed to finance capital improvements while times were good, were caught unaware. As coal prices crashed, their loan payments became a larger and larger part of their balance sheets; while the coal companies could continue to pay for operations, they could not pay their creditors.

The four largest coal producers lost 99.9% of their market value over the last 6 years. Today, over half of coal is being mined by companies in some form of bankruptcy.

The four largest coal companies had a combined market value of approximately zero in 2016. This image is one element of a larger graphic on the collapse of coal from Visual Capitalist.

When self-driving cars are released, consumption of oil will similarly collapse.

Oil drilling will cease, as existing fields become sufficient to meet demand. Refiners, whose huge capital investments are dedicated to producing gasoline for automobiles, will write off their loans, and many will go under entirely. Even some pipeline operators, historically the most profitable portion of the oil business, will be challenged as high cost supply such as the Canadian tar sands stop producing.

A decade from now, many investors in oil may be wiped out. Oil will still be in widespread use, even under this scenario — applications such as road tarring are not as amenable to disruption by software. But much of today’s oil drilling, transport, and refining infrastructure will be redundant, or ill-fit to handle the heavier oils needed for powering ships, heating buildings, or making asphalt. And like today’s coal companies, oil companies like TransCanada may have no money left to clean up the mess they’ve left.


Of course, it would be better for the environment, investors, and society if oil companies curtailed their investing today, in preparation for the long winter ahead. Belief in global warming or the risks of oil spills is no longer needed to oppose oil projects — oil infrastructure like the Keystone XL will become a stranded asset before it can ever return its investment.

Unless we have the wisdom not to build it.

The battle over oil has historically been a personal battle — a skirmish between tribes over politics and morality, over how we define ourselves and our future. But the battle over self-driving cars will be fought on a different front. It will be about reliability, efficiency, and cost. And for the first time, Big Oil will be on the weaker side.

Within just a few years, Big Oil will stagger and start to fall. For anyone who feels uneasy about this, I want to emphasize that this prediction isn’t driven by environmental righteousness or some left-leaning fantasy. It’s nothing personal. It’s just business.



[1] Thinking about how fast a technology will flip is worth another post on its own. Suffice it to say that the key issues are (1) how big is the improvement?, and (2) is there a channel to market already established? The improvement in this case is a drop in cost of >2X — that’s pretty large. And the channel to market — smartphones — is already deployed. As of a year ago, 15% of Americans had hailed a ride using an app, so there is a small barrier to entry as people learn this new behavior, but certainly no larger than the barrier to smartphone adoption was in 2007. So as I said, I broadly believe that the roll-out will occur in about a decade. But any more detail would require an entirely new post.

Source: https://medium.com/@sethmiller_59231/this-is-how-big-oil-will-die-38b843bd4fe0

 

How Small Events Trigger Large Events in Politics & Economics

The following video illustrates the power of small events to trigger large events. The Great Depression of 1929-33  was triggered, for example, by the default of a small bank in Austria called Creditanstalt. It declared bankruptcy on 11 May 1931 and was one of the first major bank failures that initiated the Great Depression at a global level.

Domino Chain Reaction

 As Henry Hazlitt explains:

“the bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of the proposed course; the good economist looks also at the longer and indirect consequences.”  

Nowhere is the power of small events more apparent than in politics and economics. The recent UK General Election has unleashed a bevy of unintended consequences some of which will not be realized for decades to come.

Political Risk in 2017-2018

In the UK, the conservatives it appears, will win a reduced majority to govern the UK and Brexit process. It is also clear that a loss or hung parliament  for the Conservatives will set the UK back a hundred years politically and economically in the confusion and discord it would sew.

There is a minor risk of a hung parliament where, like 2010, the new government may have to collaborate to hold office. This would make managing the Brexit process untenable. The loss of political and economic confidence that would ensue would bring chaos to the UK. Should there be an outright victory to Labor, we would see a reversion to the 1950/70’s style politics that would also be a disaster.

So, the stakes are just as high as they were in June 2016. What was a ‘sure thing’ bet at the start of the election process has become marginal at a time when the consequences are high. The spontaneous ordering of the voting process may check politicians from being able to achieve their agenda at the expense of the national interest. What hubris by PM May who put personal agenda ahead of the national political interest.

This is typical of the problems found in liberal democracies. Liberal democracies around the world are dying. Voters are cynical of the promises and ability of politicians to achieve anything.

Flag - EU 12Ironically, the EU have hailed Macron’s victory as a sign that right wing populism has peaked and in remission. With no mirror for self reflection the EU elite are back at ‘business as usual’. “Nothing to look at here – move on”! They needed a Le Pen win to shock them into making real change. Macron’s victory has only deferred the inevitable by a year. Meanwhile, the political change that is sweeping the world at present will continue with German elections in October this year. Merkel it appears is set for a heavy defeat.

And in the USA the left wing is continuing its attempt to undermine President Trump and effectively ignore the rule of law. Left wing forces operating at every level of US media, government and politics are moving to impeach Trump. Meanwhile the silent majority that elected Trump are watching and waiting and growing angry.

The last time we saw his level of scale of political unrest was 1740 – 1785 culminating in the French Revolution. The rising tide of political unrest in the USA, UK and EU is polarized by left vs right as well as the elite vs the people. Remember, when political confidence falters, economic confidence falls soon after. This is what is happening now. As pressures continue to mount in the USA and EU there is increasing risk of civil strife breaking out.

The phase June 2017 to December 2018 remains a time of escalating risk. Over this 18 month time frame, what transpires will shape the world and its history for the next 12 years and set up the circumstances that will shape the rest of this century.

Contrary Opinion and the French Elections

Going into the final round of the French Presidential election we see heavy media bias for Macron to win over Le Pen. Polls indicate Macron  should win by a comfortable margin. The Law of Contrary Opinion in 2016 had indicated another upset due.

There are mitigating factors at play however. Having correctly picked the Australian, Brexit and US Presidential elections, we point out that the shock results shown in those elections all occurred after lengthy social and political trends had been underway for sometime. We see there is a lower probability that contrary opinion may affect the outcome. We had predicted in 2016 that Le Pen would receive the presidential mandate. We still hold to that view which would have an immediate negative impact on financial markets whichever candidate wins. Markets appear poised for a fast corrective move to the downside before resuming their longer term trends.

Longer term, if Le Pen happened to win, there would be a soft EU awakening and resolution. Macron’s win will have the effect of bringing on a hard EU awakening and resolution.

Pendulum of Government Overreach has Peaked

The pendulum of government overreach has peaked in most liberal democratic countries around the world (for now). The major political events of 2016 have shown increasing resistance to government given the rising number of breaches in civil liberties and failure of government to identify and respond to the disenfranchised members of their societies.

Many segments of society have felt themselves becoming impoverishment. At the same time they have watched the hubris, greed and failure of politicians to deliver solutions to resolve the various politically made crises. One of the recurring questions that will emerge is the role of government in the lives of people.

By the time politicians’ hubris has completely evaporated, the nature of liberal democratic countries will have changed. We see major risk of political, economic and social upheaval occurring between now and 2028-2033 This phase may extend before social, political and economic stability becomes the norm. As always the pendulum will one day swing again towards increasing government involvement in the lives and affairs of ordinary people.

Political Prediction Results 2016

We called the US Presidential election (27/07/2016 & 29/10/2016) saying Trump would win. We called the Australian federal election and while we didn’t quite get what we thought would happen, we got second best with the Australian people being the winners (16/06/2016, 28/06/2016 & 24/07/2016).

Expect further political upsets in 2017 with elections falling due in France and Germany.

US Presidential Election Comment

All the elements are in place for a political meltdown with the coming election. The circumstances of this election are very similar to the Brexit vote that caused an earthquake.

Consider:

  • There is a large disenfranchised portion of the US electorate.
  • Establishment seeks to maintain the status quo.
  • Widespread disgust at both presidential candidates.
  • Media is holding a heavily biased standpoint on the outcome of the election result.
  • Financial markets are coiling in preparation for a large move based on the result.
  • Fears of vote rigging, mudslinging by both candidates, the focus is on personalities rather than issues leaving a gridlocked political system.

Most of these points were present in the Brexit vote.

The underlying social mood is one pointing to a political meltdown. If Trump wins, Democrats have rumored to be plotting some sort of nullification of the election result. It is also unacceptable to the establishment that Trump would win as he has threatened to tear down the status quo. If Clinton wins, all the corruption scandals will be brought before the courts and her presidency will be mired by political, legal & criminal scandals.

The social environment is volatile and ripe for serious political disruption as people seek to express the powerful social mood that has been building for several years. We consider the election will serve as the catalyst for the start for a political meltdown lasting many years. Following in quick attendance will be the subsequent loss of economic confidence.

We still predict a spike to the upside following the election – being the last gasp of the stock markets. This will be followed in 2017 by a surge in inflation and a devastating shift in US interest rates.

All of this is characteristic of a major top that is forming in economic, social and political terms. It is akin to the rise and peak of an empire. We are witnessing a major turning point in history and a completion of a long term cycle of human endeavor. This is covered in our main article theme the End of the Long Game 2009 -2018.

US Presidential Election Prediction

Its clear we are in a cycle of increasing political chaos and uncertainty. This is continuing to escalate. Its happening in liberal democratic countries. National elections are due in these countries (Germandonald-trumpy, France 2017), UK (2018). We can anticipate major upheavals along with the US. We are seeing the death throes of the liberal democratic tradition. Worsening economic inequality, the self interest of political elites, political coverups, politicians unable to deliver on their promises, vote rigging, dodgy economics, disenfranchised voters, unaccountable rogue police are just some of the issues to be seen in newspapers and television. Democracy, a human system, like all systems before, is failing.

Next US President

Given the increasing political chaos we anticipate Donald Trump will be elected as the 45th US President of the United States of America. Between now and November we should see a marked swing towards Trump. Viewing the US situation through the lens of cycles analysis we step beyond the character and reputation of US Presidential nominees to see the fabric of a society and economy being eroded through self interest.This process has been underway for over 5 decades.TruHillary Clinton imagesmp’s election should be seen as the response to a disenfranchised electorate. That’s both within the parties and without. Its an  increasingly angry social mood. Voters are angry and one of their few options is to respond at the ballot. Electoral horror at the status quo has emerged with a dual society – the haves and have nots, cronyism, hidden interests, corporatism, the endless wars, spurious economics, indebtedness………..

Like Brexit and many of the problems we are witnessing nightly in the news (EU refugee crisis, police and citizen shootings, etc), many crises have been manufactured by governments themselves.

We witness the unfolding political, social and economic drama of the USA and by extension the global stage since the US ascended to become the global hegemon after WWII. Most people acknowledge things have gone terribly wrong over the last 20 years but nobody knows what to do. There is little or no confidence in the political class, or their technocrat advisors, government institutions, the economy and society at large. We anticipate the continuing breakdown of the status quo an Trump’s election to the presidency is merely a reflection of the zeitgeist of our time. Yet this is perfectly understandable when you step back from the noise of daily media and observe the cycles of history evolving before our eyes.

History Repeating

An historical example of a time when a large scale breakdown of society occurred on this scale was during the phase 1740-1792 leading to the French Revolution. This time however, with globalization, it spans over many countries. At that time we saw increasing political instability with its attendant corruption, economic decay and the polarization of the people against the political elites (king and government). It’s happened many times before as any student of history will testify, is happening now and will happen again as humans consistently fail to learn from their past.

Understanding Cyclic History

We are witnessing in our lifetime the completion of large scale cycles of human endeavor and activity with the attendant dislocation and reallocation of social, economic and political activity and resources. An understanding of the broad brush strokes economically, socially and politically may serve to enhance your perspective on what emerges next. The scale of forces at work in liberal and democratic societies and economies is so huge that the current drama is taking decades to unfold.

This is the topping and completion process of an economic cycle that has been going on for around 224 years. By the time this top and the ensuing drama is finished, it may well have spanned generations of people. On a historical note, we are witnessing the completion of the growth phase of the industrial revolution cycle that began around 1783-5.

And so what does Trump have to do with economic cycles?

The current political chaos will continue to intensify and this will give way eventually into economic chaos. The impending signs  for that economic chaos are clearly to be seen and once again it centers on the incapacity of central planners and bureaucrats to perceive the unintended consequences of their mischief. Trump has nothing to do with these economic cycles. He merely reflects the zeitgeist of the times. Like someone surfing a wave, they ride the wave for a period of time then disappear into the footnotes of history. Trump has often appeared at major tops of economic cycles in the last 30 years in US history. Its not surprising then he has reappeared surfing the zeitgeist wave as the US completes the topping phase of this huge cycle of human endeavor.

Trump’s ability to ride the social mood of the time we believe will help him to take the presidency. Whether he will have the power to change the status quo, like Obama who promised major change yet found himself caught in the entrenched self interest of Congress, Wall Street, Big Pharma and the military. Trump may well ride the last vestiges of prosperity in this cycle. Given the growing political and economic storm Trump may well find himself the target of assassination attempts in the next four years. He will be remembered as the President that reigned at the time the US and world peaked in economic activity for many decades to come.

Whether we have a few more months or years of twilight before the downside comes home to roost, suffice to say, from now on we can expect increasingly tough times punctuated by phases of optimism. The current political chaos will continue to intensify and this will give way into economic chaos. The impending signs  for that economic chaos are already clearly seen and once again it the focus centers on the incapacity of central planners and bureaucrats to perceive the unintended consequences of their mischief. Will people in future times learn from our mistakes and mistakes of the past? We think not.

Post Australian Election Commentary

In our Australian election forecast of 28/06/16 and 16/06/2016 we forecast the risk of a ‘hung parliament’ or an outright win to the ALP. This was based on the principle of ‘Contrary Opinion’.

It took two weeks to resolve the final outcome of the national election. It left a Liberal government in power but without a majority in the Senate. The result has continued the ongoing risk element in Australian politics. Should government fail to deliver or introduces any form of controversial legislation, we may expect blocking in the Senate. Not quite the ‘hung parliament’ suggested but a second best – with a kind of severe arm lock if government steps beyond its mandate.

The voters got what they wanted. Through the mysterious spontaneous ordering process, the electoral process has communicated the deep level of cynicism Australians have towards politicians. It also reflects that no politician really has any clear solution or way forward for society and economy. And so voters have ensured that politicians can’t get away with too much. Little has been said by politicians that offers any resonance with voters.

Economic, social  and political restructuring is needed to set Australia on course for its next phase. The electorate is exhausted by the constant personality bicker of politicians and their inability to tackle the big issues. Politicians have delivered a consistent message for over a decade that political self interest is more important than the people. Accordingly, many believe the economic and social decline experienced by Australians is set to continue.

Unfortunately, without a clear vision from government and a high risk of being blocked by the Senate, Australia remains in an entropic state with a continuing risk of stagnation. This trend may start to accelerate as capital outflows intensify over late 2016/2017 into US dollars. We anticipate inflation in the USA will climb rapidly over the next 1-2 years. Capital will be sucked from the EU and periphery including Australia. This will indeed be the last gasp of the ‘end of the long game.’

Contrary Opinion and Australian Elections

As political risk increases in all liberal democratic countries we can expect to see the contrary opinion factor playing a greater role in evaluating risk in elections and other important events.

One example is of course Brexit, while a close call, consensus opinion was that the UK would remain. Similarly, the Australian election consensus has continuously been that the Liberal Party of Australia would prevail. However, as previously posted (16/06/16), the Australian electorate is deeply cynical of its politicians and none of the contenders for the 2016 federal election are offering a way forward.

Economic, social  and political reform is needed to set Australia on course for the next phase of its 100 year odd history. Its clear that the electorate is exhausted by the constant personality bicker of politicians and their inability to tackle the big issues. The consistent message for over a decade is that political self interest is more important than the people. Accordingly many believe the economic and social decline experienced by many Australians is set to continue.

Little has been said by politicians that offers any resonance with voters. So with this dissonance there is room for the Law of Contrary Opinion to operate. The law suggests “if everybody thinks one thing then bet the other way.” This law works well at times of extremity. For example, consensus thinking at elections, stock market highs and lows, etc, etc. Traders of financial markets use this tool when market sentiment is strongly biased.

Based on contrary opinion then, expect an upset on July 2nd with either a hung parliament or an outright win to the Australian Labor Party.

Brexit Impact 2016

Should the “leave” vote win the coming UK referendum you can expect the impact to have global consequences. It will challenge the survivability of the EU. At the same time it will create massive flights of capital around the world as investors seek refuge for their money. Anticipate the USD being strongly bid. This will have a huge impact on US stock markets at the expense of peripheral markets and their currencies. The nature of global economics has been apparent for some time, though not obvious.  Brexit will cause this to accelerate.

What is clear is the counter-intuitive nature of the Brexit situation. The narrative being promoted by the “in” vote is not what it seems. Democratic processes to do with EU politics have earned a reputation for not being so straight forward with several countries having the “will of the people” overturned in the last decade or so.

Should the UK decide to remain in the EU, we anticipate this will only serve to delay the inevitably. Namely the demise of the EU itself. A reading of history itself should remind that all political systems fail and a political system built on faulty premises to begin with, fail sooner. Thus, human nature expresses itself in a cyclical manner again and again.

Australian Political Elections 2016

It seems Australian voters want another “hung parliament”. The main parties are both doing their best to lose winning government. Little they say offers any resonance with voters.

The Australian electorate is deeply cynical of its politicians and none of the contenders for the 2016 federal election are offering anything offering a way forward. Economic, social  and political reform is needed to set Australia on course for the next phase of its 100 year odd history. Its clear that the electorate is exhausted by the constant personality bicker of politicians and their inability to tackle the big issues. The consistent message for over a decade is that political self interest is more important than the Australian people. Accordingly many believe the economic and social decline experienced by many Australians is set to continue.

Confirming this, we see a lethargic economy and a growing sense of unease many Australians feel about their prospects. This reflects a deteriorating social mood. It won’t be long before this translates into a declining economy. Indeed, capital flows into and out of Australia indicate the tide is definitely running out and despite the best attempts of the RBA, we may soon see the downside of the business cycle in full flight. A good barometer highlighting this is the Australian stock market which remains stalled around the 5300 level ( ASX/SP 200) whilst US stock markets hover relatively near their all time highs.

 

The Structure of Collapse: 2016-2019

Charles Hugh Smith writing on his blog Of Two Minds:

The end-state of unsustainable systems is collapse. Though collapse may appear to be sudden and chaotic, we can discern key structures that guide the processes of collapse.

Though the subject is complex enough to justify an entire shelf of books, these six dynamics are sufficient to illuminate the inevitable collapse of the status quo.

1. Doing more of what has failed spectacularly. The leaders of the status quo inevitably keep doing more of what worked in the past, even when it no longer works. Indeed, the failure only increases the leadership’s push to new extremes of what has failed spectacularly. At some point, this single-minded pursuit of failed policies speeds the system’s collapse.

2. Emergency measures become permanent policies. The status quo’s leaders expect the system to right itself once emergency measures stabilize a crisis. But broken systems cannot right themselves, and so the leadership is forced to make temporary emergency measures (such as lowering interest rates to zero) permanent policy. This increases the fragility of the system, as any attempt to end the emergency measures triggers a system-threatening crisis.

3. Diminishing returns on status quo solutions. Back when the economic tree was loaded with low-hanging fruit, solutions such as lowering interest rates had a large multiplier effect. But as the tree is stripped of fruit, the returns on these solutions diminish to zero.

4. Declining social mobility. As the economic pie shrinks, the privileged maintain or increase their share, and the slice left to the disenfranchised shrinks. As the privileged take care of their own class, there are fewer slots open for talented outsiders. The status quo is slowly starved of talent and the ranks of those opposed to the status quo swell with those denied access to the top rungs of the social mobility ladder.

5. The social order loses cohesion and shared purpose as the social-economic classes pull apart. The top of the wealth/power pyramid no longer serves in the armed forces, and withdraws from contact with the lower classes. Lacking a unifying social purpose, each class pursues its self-interests to the detriment of the nation and society as a whole.

6. Strapped for cash as tax revenues decline, the state borrows more money and devalues its currency as a means of maintaining the illusion that it can fulfill all its promises. As the purchasing power of the currency declines, people lose faith in the state’s currency. Once faith is lost, the value of the currency declines rapidly and the state’s insolvency is revealed.

Each of these dynamics is easily visible in the global status quo.

As an example of doing more of what has failed spectacularly, consider how financialization inevitably inflates speculative bubbles, which eventually crash with devastating consequences. But since the status quo is dependent on financialization for its income, the only possible response is to increase debt and speculation—the causes of the bubble and its collapse—to inflate another bubble. In other words, do more of what failed spectacularly.

This process of doing more of what failed spectacularly appears sustainable for a time, but this superficial success masks the underlying dynamic of diminishing returns: each reflation of the failed system requires greater commitments of capital and debt. Financialization is pushed to new unprecedented extremes, as nothing less will generate the desired bubble.

 Rising costs narrow the maneuvering room left to system managers. The central bank’s suppression of interest rates is an example. As the economy falters, central banks lower interest rates and increase the credit available to the financial system.

This stimulus works well in the first downturn, but less well in the second and not at all in the third, for the simple reason that interest rates have been dropped to zero and credit has been increased to near-infinite.

The last desperate push to do more of what failed spectacularly is for central banks to lower interest rates to below-zero: it costs depositors money to leave their cash in the bank. This last-ditch policy is now firmly entrenched in Europe, and many expect it to spread around the world as central banks have exhausted less extreme policies.

The status quo’s primary imperative is self-preservation, and this imperative drives the falsification of data to sell the public on the idea that prosperity is still rising and the elites are doing an excellent job of managing the economy.

Since real reform would threaten those at the top of the wealth/power pyramid, fake reforms and fake economic data become the order of the day.

Leaders face a no-win dilemma: any change of course will crash the system, but maintaining the current course will also crash the system.

Welcome to 2016-2019.

Source: http://www.oftwominds.com/blogjune16/collapse6-16.html

Malcolm Turnbull has plenty to smile about

Malcolm Turnbull’s personal popularity has improved over the summer parliamentary recess, according to a new poll, suggesting the prime minister’s electoral “honeymoon is not over yet.

A Seven News/ReachTel poll shows the Coalition retains a 55% to 45% lead over Labor on a two-party preferred basis, which is stable compared with the previous corresponding poll conducted in November.

Ministerial scandals, which led to Jamie Briggs resigning and Mal Brough standing aside just after Christmas, and the Liberal party’s jostling over forthcoming preselections in New South Wales do not appear to have dented the Coalition’s support.

The proportion of people nominating Turnbull as preferred prime minister rose nearly 10 points to 80.8%, while those favouring Bill Shorten declined by the same number of points to 19.2%.

 

Respondents were unimpressed with Shorten’s performance as opposition leader, with just 13.8% saying it was good or very good (down 6.8 points) and 57.4% believing it was poor or very poor (up 9.9 points).

Shorten has embarked on a three-week national tour of marginal seats to campaign against increasing the goods and services tax, cutting penalty rates and reducing pathology incentive funding.

“We will oppose a 15% GST on everything with every breath in our body,” he said in Alice Springs on Friday.

The government has accused Shorten of mounting a “scare campaign” and it is yet to settle details of the tax package it will take to voters at this year’s election.

The treasurer, Scott Morrison, rubbished speculation about an early election. “The election is at the other end of this year,” he said on Friday.

The prime minister has returned to Australia after visiting troops in Iraq and Afghanistan and travelling to the US for a meeting with Barack Obama.

In the final ReachTel before Turnbull challenged for the Liberal leadership in September, Shorten led Tony Abbott as preferred prime minister, 57.9% to 42.1%.

Source: Guardian

JP Morgan to Leave UK if it Quits EU

JP Morgan, one of the leading banks in the world has threatened to quit UK if it decides to leave EU after the proposed referendum on the matter.

Jamie Dimon, the chairman and chief executive of JP Morgan, says his bank might quit the UK if Britain exits the European Union. “Britain’s been a great home for financial companies and it’s benefited London quite a bit. We’d like to stay there but if we can’t, we can’t,” he said in Davos, Switzerland and the World Economic Forum meetings.

The bank employs 19,000 people in Britain.

For JPMorgan, British membership in the EU is important since it provides the bank with “passporting” rules that allow it to do business across the 28-member bloc.

For the UK, membership is not as important. Overall trade does not require EU membership. Non-members such as Norway or Switzerland, trade with the EU makes up a bigger share of the total than it does for Britain.

Britain’s Prime Minister’s David Cameron hopes to  hold an EU referendum in June.

Source: EconomicPolicyJournal.com